Smoke & Mirrors: Bankruptcy Relief Remains Elusive for Marijuana Businesses and their Creditors

(Excerpt) Today, twenty-three states and the District of Columbia allow marijuana for medical purposes, and four of those states and the District of Columbia have legalized the drug’s recreational use. Despite this tidal shift in state laws and public opinion, marijuana remains a Schedule I substance under the Controlled Substances Act (“CSA”), meaning the federal government does not recognize its use in medical treatment, classifies the drug as having a high potential for abuse, and that no prescriptions may be written for it. Moreover, the CSA specifically makes it illegal to “rent, lease, profit from or make available for use” real property for the distribution or manufacture of a controlled substance. Federal law also criminalizes any action that “aids, abets, counsels, commands, induces or procures” the sale and use of a controlled substance. The legalization of marijuana at the state level has resulted in a multibillion dollar industry of producers, distributors, not-for-profit vendors, and for-profit management companies. A corollary of this bloom in industry is the inevitability that sooner or later, some of these companies will seek bankruptcy relief. So as public opinion evolves, laws change, and jurisprudence develops, one question emerges: can a medical marijuana company legal under state law seek relief under title 11 of the United States Code (the “Bankruptcy Code”)? This article will explore the present question in a threefold approach. Part I analyzes the role of judicial discretion in “for cause” dismissal pursuant to 11 U.S.C. § 707(a). Part II examines the common law doctrine of “unclean hands” and its application to marijuana-related bankruptcies. Part III concludes by analyzing the convergence of these doctrines as preventing creditors from filing involuntary chapter 7 petitions against their debtors